Fundamentals Determining Prices in the Market for Water Entitlements: An Australian Case Study

Abstract

Prices paid in the market for water entitlements within the Goulburn-Murray Irrigation District in Australia have increased by 15% p.a. over the 10-year period from 1993 to 2003. This is less than half the increase that has taken place in the market for water allocations during the same period. Regression analyses show very few relationships between commodity prices and prices of water entitlements, with only wine grape prices having a significant positive influence on price. Correlation analyses show strong negative correlations between commodity prices and the price of water entitlements, especially with dairy products, which is the main high value industry within the district. The major factors influencing the price of water entitlements are: the price of water in the allocation market, the level of seasonal allocation, vine grape prices and interest rates. There is some evidence to suggest that high value producers have been willing to pay increasing prices as supply has declined in order to protect their long-term investments in permanent plantings and other capital investments such as dairy equipment and cattle. The negative correlation with dairy prices indicates that dairy farmers have had to accepted to pay higher prices despite a relative fall in commodity prices; the increase in the price of water has therefore come out of irrigators' profit margins and not out of increased income.